Sunday, September 26, 2010

Nobody likes to hear a bleak diagnosis. But without a proper diagnosis, if you have a serious illness, your chances of survival become vanishingly small.

Enter Guy McPherson, conservation biologist, climate scientist and blogger, who despite his gloomy outlook about the prospects for industrial civilization--he thinks it could disappear within his lifetime--regards himself as an optimist. Why? Because back in 2002 after he finished editing a book on global climate change, he concluded that "we had set events in motion that would cause our own extinction, probably by 2030."

But, then he discovered the concept of peak oil and realized that "its consequences might bring the industrial economy to an overdue close, just in time." That development would make it possible for humans to persist on the planet for a considerably longer time by saving the life support systems of the Earth essential to both humans and the other species which humans rely on. Peak oil became a cause for optimism rather than pessimism.

I asked McPherson, who gave a talk this weekend near where I live, what would change his mind about the trajectory of industrial civilization. He answered that the discovery of a miraculous, cheap, easily scalable new energy source would probably allow our current arrangements to persist for a while longer. But such a development would be a death sentence for the human race since it would lead to the total destruction of the life support systems we rely on, systems which are only seriously crippled now. It would result in further population overshoot, resource depletion including that of soil and water, and further destruction of species we rely on for our well-being.

He likened what we are doing now to constructing an extra floor on the top of a 30-story brick structure using bricks pulled from the lower floors. We are engaging in the "world's largest game of Jenga" with the building blocks of our existence.

He says the emerging collapse of our modern living arrangements is not a recent phenomenon, but actually an ongoing process. He traces it back to the oil crises of the 1970s which were the beginning of the end. The key metric in his view is a peak in per capita oil consumption in 1979. McPherson says he would not be surprised if the endgame for industrial civilization plays out very quickly given the long period of stress both human society and the biosphere have been under for the last generation.

As a response he suggests focusing on four things: water, food, maintaining proper body temperature, and community. Water and food are obvious needs, but many of us don't think about whether the climate we live in will allow us to maintain proper body temperature. We have central heating and air conditioning to help us with that. But when such amenities are not available, the climate where we live will become crucial to our well-being and comfort.

By community he means building ties of mutual support with one's neighbors. "There ain't no lone rangers in collapse," McPherson explained. "If you look for ways to serve your community, you've got a good life ahead." His model is Monticello (minus the slaves) where "agriculture was the center of commerce and therefore the center of life."

As part of his own preparations he lives on land at moderate elevation with deep soils and easily accessible water. He grows food and raises goats for milk. The area is already populated by what he calls "life-loving economic doomers" who do not need to be convinced that industrial civilization is coming to an end. Mutual assistance is a way of life. Practical concerns trump philosophical and religious differences.

To do all this McPherson left his position as a tenured professor. He says at the beginning he knew practically nothing about how to provide the necessities for himself. "I could barely distinguish between a zucchini and a screwdriver," he explained. Now, he's milking goats, making cheese, growing vegetables and performing myriad our tasks necessary to a more localized existence, one that does not rely so heavily on the far-flung logistical networks of the globalized economy.

He doesn't call what he's doing "sustainable," a term which, he said, has even been co-opted by Wal-Mart. Instead, he refers to it as "durable," meaning he is trying to build a way of life that will outlive industrial civilization. He said his cosseted existence as an academic did little to prepare him for what he is doing now. But precisely because of this he is convinced that "if I can do this, anyone can do this."

And, in the manner of a principled prophet on a lonely mission, he soldiers on each day trying to help others build a durable way of life before it's too late.

Wednesday, September 22, 2010

A detailed schedule is now available for the ASPO-USA World Oil Conference in Washington, D.C., October 7 through 9. I am now told starting today that for the next 50 individual attendees or persons representing nonprofits or educational institutions, using the discount code "peakoi12010" will allow registration for as little as $175.

I will be attending the entire conference. Please look me up if you are there.

Sunday, September 19, 2010

Nicole Foss looks like she might be your grandmother coming to reassure you about something. But instead of milk and cookies you are served a cold dose of reality. According to Foss, one of the writers on the popular finance-oriented blog The Automatic Earth, the global economy is locked into an inexorable deflationary decline that cannot be stopped by governments or central banks. And, the world is headed for a depression worse than that of the 1930s.

Believe it or not, that's the good news. The bad news is that the problems we face in the emerging depression will be aggravated by fossil fuel depletion, in particular, the onset of world peak oil production. When one questioner asked Foss when she thought we might return to even the tepid economic activity we see today, she had a one-word answer: "Never."

Her explanation is that the interaction between the ongoing collapse of contemporary finance and the development of new oil and gas fields will leave us desperately short of these critical fuels over time. The weakness in the economy will lead to low investment in exploration for new oil and gas reservoirs which will, in turn, lead ultimately to a supply collapse. The supply collapse will lead to high prices which will depress economic activity and lead to recurrent economic contractions. When the new Great Depression is done, Foss claims that the world will be a completely different place with our current institutions swept into the dustbin of history.

Foss is remarkably good at delivering her message. She delivered it in person recently in a high school auditorium near where I live. Steady and clear, she methodically lays out her case for the scenario above with such logical precision and compelling analogies that you wonder just how one would go about making even the slightest dent in it. Of course, no one knows the future. Some people make lucky guesses--sometimes called "informed" predictions. But in the end it's never clear how to tell ahead of time whom to believe during the next round of predictions.

Nicole Foss does, however, seem remarkably informed. She is at ease talking about the necessity of acquiring your own tools and growing own your food. In the next breathe she's just as much at ease explaining with stunning clarity and brevity why the current chairman of the U. S. Federal Reserve Board is an even bigger fool that you thought he was. But she does this without any sign of personal animus. Ben Bernanke isn't a bad person. He's just confused and misinformed.

And, that leads us directly to Foss's mission: To inform people so that they will have the understanding and tools to weather the coming storm and to build a community that can survive and thrive through it. She also demystifies the world of finance with unusual pithiness. The most recent financial bubble was not the result of some impenetrable, new-fangled financial instruments. Rather its roots were the same as all financial bubbles: the rediscovery of leverage. Translation: If you borrow money from someone else and speculate with it, you can make a lot more money than if you just use your own. It's a tactic that works until it doesn't. And, when it stops working, the economy goes crash.

The post-Depression generation had learned that too much borrowing leads to tears, and so they were very careful not to take on too much debt. Eventually, the people who experienced these tears died, and others took their place in the economy. The success of those who took on debt for speculative purposes attracted more people who took on debt to do the same in every field of investment. Eventually, too many people borrowed too much, and many of them were unable even to meet their interest payments. That is where we are today. According to Foss, it will be years until that excess debt is either paid or defaulted on. And, that means deflation for several years to come at least.

Is she right? No one can know until we travel some years hence. But so far, I'm having a hard time cracking her logic.

Sunday, September 12, 2010

It is a frequent conceit among hard money advocates that central banks and especially the U. S. Federal Reserve Bank are out to debase their currencies in order to save debtors. Below I will show why this statement--although seemingly borne out by observation--can result in misleading conclusions about the motives of central banks. But first, let me lay out more thoroughly the hard money advocates' explanation of how the world works.

Central banks debase currency by printing excess currency or by enabling the rapid expansion of credit, both of which put more money in circulation. When the amount of money in circulation rises with no corresponding rise in the production of actual goods and services, then more money is chasing after the same amount of goods and services. That creates an inflation, that is, a general rise in prices, which usually leads to a rise in wages and in asset values in such areas as housing and the stock market. If you are in debt and your wages are rising, this naturally makes it easier to pay back your loans which are, of course, for a fixed number of dollars or euros or other currency. In other words, the loan amounts are not adjusted for inflation even as wages and the price of assets rise.

Naturally, those who've been prudent and saved and therefore have money to lend are penalized since when their loans are repaid, the money they receive back, even with interest, often buys less than it did when they lent it. This is the standard explanation of how savers get gypped and profligates get rewarded under what is called a fiat money system, that is, a system of currency which is merely decreed by a national government. In the United States the U. S. dollar is legal tender because the government says it is. There is no formal backing with precious metals or anything else.

Why do central banks supposedly cater to debtors? It's because they make up the majority of the electorate who have any combination of home mortgages, car loans, credit card debt, and installment credit. The political pressure on the banks is thought to be so great to bailout the masses who are in debt that these banks cannot carry out their primary mandate to maintain the purchasing power of the currency.

Maintaining the value of currency would, however, favor savers, and the majority of savings are held by the very wealthy. In the United States the wealthiest 10 percent of the population hold a whopping 70 percent of all wealth. In Switzerland the numbers are almost the same. In Denmark the wealthiest 10 percent hold 65 percent of the total wealth. In Germany the amount is 44 percent.

But is it true that inflation is never good for the wealthy who are the world's chief lenders? It depends on what the wealthy own and what type of inflation one is talking about. If they own real estate, and the wealthy own a substantial amount of it, inflation can make these prices rise. If they own stocks, and the wealthiest 10 percent in the United States own more than 80 percent of all equities, inflation can make them rise either by stimulating economic activity or by encouraging people to enter the stock market to preserve their wealth thus bidding up stock prices.

Naturally, the wealthy have bank deposits which are lent out. And, they own bonds, government, municipal and corporate. In fact, they buy lots of them. Now, inflation hurts the value of these investments, but bank deposits and bonds are by no means the principal investments of the wealthy.

Now, let's return to the role and purpose of central banks. The purpose of any central bank is to ensure the stability of a country's banking system. And, the banking system in most democratic countries is in private hands, and that means in the hands of the wealthiest, either through stock and bond ownership or through direct investment in banks. So, indirectly, at least, the purpose of central banks is to insure a major repository of wealth for the world's very richest people. So far, in this task, the central banks have performed miracles. Many of the world's largest banks are, in fact, insolvent, and yet they have continued to function after the 2008 financial meltdown through a combination of regulatory forbearance, massive liquidity injections from central banks, and government guarantees and direct investment.

The hard money advocates warned that this bailout of the banking system would make so much money available for loans that the world would experience a bout of high inflation if not hyperinflation. Credit would once again flow so freely that money would flood the economy without a corresponding increase in goods and service. As people realized the inflationary effects of this new credit bubble, they would rapidly flee paper claims on wealth such as bonds and bank accounts and move their money into real goods such as commodities, particularly precious metals, and claims on real productive assets such as stocks.

But this has not happened. Instead, the banks, at least in the United States, have chosen to park their massive liquidity injections at the Federal Reserve or in government bonds where they earn essentially risk-free returns. This has turned out to be a backdoor method for transferring public funds to ailing banks through government expenditures on bond interest. And so, by any reasonable measure, private credit continues to shrink worldwide as public credit (i.e. government borrowing) expands. So far this has enabled a more orderly deleveraging on the part of companies and households than would otherwise have been the case. This is because you can deleverage in two ways; either you can pay back your loans or you can simply default on them. So far defaults have been kept in check. But government support of the economy has resulted in neither a substantial economic recovery nor an inflationary spiral. In fact, the biggest fear among central bankers is that the world could once again fall into the maw of deflation as it did in 2008.

By "public" we can assume that the commentator cited above is talking about people who make considerably less money than he does. And yet, we already know that more than 80 percent of all equities in the United States are owned by people in the top 10 percent measured by assets. These people are unlikely to spend on consumer goods a substantial portion of the proceeds from any stock sale since their basic needs have already been met. They are much more likely to reinvest the money they receive in something else. As for the other 20 percent of equities which are held by "the public," many of those are held in pension funds, 401K plans, and IRAs, hardly sources of ready spending money. There's not much fodder for an unstoppable inflationary spiral here.

But what about direct real estate investments? Here the Federal Reserve would have to distinguish between rich homeowners trying to dump mansions or second homes and middle or working class homeowners who might spend more freely the money which they'd receive from any sales of their homes. But typically people of average means who must sell their homes are selling them because they can no longer pay the mortgage. This means that much of the money the Federal Reserve might pay for such homes would simply go to the bank holding the mortgage where, if current conditions continue to prevail, the bank will simply invest the money in low-risk government bonds.

So, even in the very unlikely circumstance that the Federal Reserve embarks on such a program, I am doubtful it would do much good. Instead, I regard the most likely course for the world economy as continued deleveraging by businesses and households for some time. And, I expect governments and central banks to continue to attempt to stimulate the economy. But all they will accomplish is to partially offset the contraction of credit which must proceed to its conclusion, that is, down to a point where debt service is manageable and prices for assets such as homes and stocks are compelling based on long-term historical trends, not compared to recent bubble-induced pricing.

Where does this leave us? While central banks seem incapable of preserving the absolute wealth of the rich, they are supremely accomplished at working in concert with central governments to preserve and even enhance the relative position of the wealthy. That is, wealth is now even more concentrated in fewer hands than it was before the 2008 crash despite the large percentage losses that the wealthy suffered along with everyone else. This is, of course, the result of failures of banks and other businesses outside the world's main financial centers, failures which have have reduced competition for the businesses and banks controlled by the superwealthy. These people may not be quite as wealthy as they were before the crash. But relatively speaking they have gained against the rest of the population in their wealth and power.

However, the wealth of the rich depends on other people, usually middle class people and the governments they fund, paying back their loans. Much of the government bailout effort has been focused on shoring up the value of the bonds of government and government-sponsored entities such as Fannie Mae and Freddie Mac, the home mortgage giants. Far from being concerned about the needs of feckless American homeowners or the Greek government, the bailouts of Fannie Mae, Freddie Mac, and Greece, to name three examples, are really about securing the investments of the banks and wealthy individuals who hold the bonds of these entities.

Of course, central bankers are right to worry about systemic financial collapse. But they always seem to think that the response to such a threat should be to guarantee the investments of the rich using the public's money. Central bankers and financial regulators often come from investment houses and banks which are, of course, controlled by the rich, and so are infected with an idea that infects so many of those who are rich or who cavort with the rich, namely, that what is good for the wealthy is more or less identical with the public interest.

The threat of inflation then comes not from any conscious policy on the part of central bankers or even most central governments who have already made their iron-clad allegiance to the wealthy classes abundantly clear. Rather the threat of inflation comes from the eventual exhaustion of government credit in the face of an intractable and unstoppable deflation brought on by continuous deleveraging of companies and households. When the governments of the world can no longer entice lenders to give them money, they will be forced to print their own. (This is usually done through the sale of bonds to central banks which then create deposits out of thin air for governments to spend.) At that point the inflation worriers may turn out to be right, in spades. Private deleveraging will have halted, but, of necessity, government credit will continue to grow at a frightening pace, probably just in order to pay the interest on and roll over the debt previously shouldered to fight deflation through government spending.

If inflation does arrive in this way, it won't be because the central banks and the government meant for it to happen. They have shown themselves to be faithful guardians of the rich. No, such a result will be pure and simple--if anything related to central banks and governments can be said to be pure and simple--a gargantuan policy mistake borne of a misunderstanding of the financial predicament we face.

When households and/or companies as a group take on more debt than they can service, then they are obliged to shed it, either by paying it down or defaulting. When this happens on a grand scale, it takes the entire economy into a deflationary depression which in turn makes it even more difficult for households and companies to pay their debts as incomes and profits tend to fall relentlessly with each new round of deflationary pressures. Every player in the economy is acting rationally by saving and by holding back on investments because they cannot be justified by consumer spending or on purchases because prices are likely to be cheaper in the months ahead. This rational behavior leads to worsening results for everyone until the deflationary spiral comes to its natural end.

No doubt there are many unforeseen events which might halt the world's slide into the deflationary mire--perhaps a large-scale war or central bank policies that essentially print paper money and hand it out to the populace. But barring such extraordinary events, inflation is likely to show up only as a latecomer to the global economy's wake. What course inflation will take and whether governments and central banks will once again be capable of stemming the losses of the wealthy is impossible to know. That they will try to stem the losses of the wealthy is beyond question.

Sunday, September 05, 2010

I am taking a holiday break and expect to post again on Sunday, September 12. In the meantime, I hope you'll take a look at my latest column on Scitizen entitled "Fossil Fuels vs. The Public Interest." You may also find of interest the many comments on the The Oil Drum under a recent piece of mine, "Personality Profile: Do you 'go with the flow' or 'stock up' just in case?" that was reposted in the campfire section of the site.